Europe

People walk past a kiosk with an advertisement for Wi-Fi provider Gowex in Madrid on July 3

Let’s Gowex (GOW:SM), a Madrid-based provider of Wi-Fi hotspot services across Europe and the Americas, was one of Spain’s highest-flying tech startups—until an investigation by a New York-based short-seller brought the publicly listed company crashing to earth this week.

Gowex announced on July 6 that it would file for insolvency after its founder and chief executive, Jenaro Garcia, admitted having filed fake financial accounts for at least the past four years. The information was brought to light by Daniel Yu, a short-seller who runs an outfit called Gotham City Research. Yu says he spent eight months investigating Gowex before issuing a report (PDF) on July 1 saying the company had misled investors about almost every aspect of its business. Garcia’s wife was Gowex’s investor-relations chief and signed off on the falsified books, Yu says.

If the details of his findings are confirmed, it’s a miracle that no one noticed the discrepancies sooner. Yu says the company’s revenues were “at most 10 percent” of the amount reported in its financial statements and that it owned or managed fewer than 5,000 Wi-Fi networks while claiming it had tens of thousands. The company told investors it had a €7.5 million ($10.2 million) contract to provide Wi-Fi hotspots in New York, Yu says, but officials there told Yu that the contract is worth less than $300,000.

Gowex’s demise has left cities such as Madrid, Paris, and New York scrambling to avoid disruption of free public Wi-Fi service provided by the company. Ian Fried, a spokesman for the New York City Economic Development Corp., says the status of about 60 Gowex-operated hotspots around the city is now “unclear.” The corporation signed a $245,000 contract with Gowex, one of several organizations chosen last year to provide Wi-Fi service in New York’s five boroughs, and had paid the company about $185,000 already, Fried tells Bloomberg News.

Yu says he targeted Gowex because he couldn’t understand how it could generate double-digit revenue growth and profit margins when peers such as Boingo (WIFI) and IPass (IPAS) were performing far worse. “All prior for-profit attempts to provide free Wi-Fi on mass scale have failed,” he wrote in his report.

Gowex, founded by Garcia in 1999, has provided Wi-Fi hotspot services in New York, San Francisco, and a number of Latin American and European cities. It had been considered an icon of Spanish entrepreneurship, winning recognition from the national government and awards from the likes of Ernst & Young.

On July 1, the day Yu released his findings, a delegation of Spanish government and business officials visited Gowex’s Madrid headquarters and praised the company and its founder. For several days after that, the company defended its accounting practices before it said on Monday that Garcia had admitted falsifying the accounts.

Gowex shares plunged 60 percent after Yu’s report and is now suspended. Exposed investors include funds managed by JP Morgan Chase (JPM) and Danske Bank (DANSKE:DC), according to Bloomberg News.

The company’s collapse has hurt shares of other companies listed on Madrid’s Alternative Stock Market, and several say they are seeking to leave the exchange.

(This article has been updated with comment from the New York City Economic Development Corp.)